Essays in financial economics

Abstract

This thesis explores topics in financial intermediation and macro-finance. In the first chapter, my co-authors and I analyse the structure of the UK repo market using a novel dataset. We estimate the extent of collateral rehypothecation, and address the question of which variables determine haircuts using transaction-level data. We find that collateral rating and transaction maturity have first order of importance in setting haircuts. Banks charge higher haircuts when they transact with non-bank institutions even after controlling for measures of counterparty risk. We examine the structure of the repo market network and we find out that banks with higher centrality measures ask for more haircuts on reverse repos and pay lower haircuts on repos.
In the second chapter, I study the real effects of benchmarking in fund management industry in a general equilibrium model where stocks of productive sectors are traded in a competitive equity market. Investors delegate their portfolio decisions to managers whose performance is benchmarked against an index. Managers hedge themselves by tilting their portfolio toward the index which increases the demand and price of the stocks that feature prominently in the index. In equilibrium there is an inefficient shift towards extreme states in which big sectors dominate the economy. I show that in presence of benchmarking, index inclusion is preceded by a rise in firm’s investment rate relative to its capital stock.
In the third chapter, I examine balance sheet recessions in a general equilibrium model where agents have heterogeneous beliefs about future technology growth. I show a channel which describes the risk concentration through belief dispersion rather than ad-hoc constraints on aggregate risk sharing. Endogenous stochastic consumption volatility arises from constant fundamental volatility. I study the role of static vis-à-vis dynamic disagreement and examine the effect of financing constraints on the equilibrium when there is belief dispersion among agents.